Question

A debtor (Joe Corp) has filed for chapter 7 bankruptcy. the balance sheet upon filings is as follows:

Cash 10 Lien Against Building 80

Building 100 Priority Creditors 30

Unsecured Creditors 20

Total Assets 110    Total Liabilities. -130

The Lien on the building is held by Coco University. The priority creditor consists of 2 creditors, and it is the City of Camden and The City of Newark at $20 and $10 respectively. The Unsecured creditors, is also 2 creditors, and it is the State of New Jersey and the State of Pennsylvania at $15 and $5 respectively.

1. If the building gets sold for $80, What amounts does each party get paid?
2. If the building gets sold for $105, How much does each party get paid?
3. If the building gets sold for $75, how much does each party get paid?

Answer 1

During Insolvency : Secured Creditors are paid first but against the property on which they have charge if the realised value is not fulfil for them, they will be treated as General Creditors for unpaid portion, then Priority Creditors and then unsecured Creditors.

CASE : 1 : When Building is sold for $85 and Cash available is $10

Firstly from $80, $80 will be paid to Coco University so balance Cash = $10

Then Priority Creditors will be paid as follows :

City of Camden = $6.67

and City of Newark = $3.33

CASE : 2 : When Building is sold for $105 and Cash available is $10

Firstly from $105, $80 will be paid to Coco University so balance Cash = $35

Then Priority Creditors will be paid as follows :

City of Camden = $20

and City of Newark = $10

so the Cash Balance will be $5 which would be paid as follows :

The State of New Jersey $3.75 and to the State of Pennsylvania = $1.25

CASE : 3 : When Building is sold for $75

and Cash available is $10

Firstly from $75, $75 will be paid to Coco University so balance Cash = $10

Then Priority Creditors will be paid as follows :

City of Camden = $6.67

and City of Newark = $3.33

For any queries please comment.

If you are satisfied please give LIKE